I know it and you know it. We've got an agency problem here- management's objectives are not aligned with the owners-and for that there's a really easy solution:
Cancel all charters for banks that don't agree to become a partnership or an unlimited-liability-company.
Never heard of an
Unlimited Company? Here's Wikipedia:
An unlimited company or private unlimited company is a hybrid company incorporated either with or without a share capital (and similar to its limited company
counterpart) but where the liability of the members or shareholders is
not limited - that is, its members or shareholders have a joint, several
and unlimited obligation to meet any insufficiency in the assets of the
company in the event of the company's formal liquidation....
Back in 2009 I mentioned one of our favorite banks in "
South Sea Bubble Survivor Says Dismantle RBS Along With Lloyds":
From Bloomberg:
Henry Hoare
made a 1.6 million- pound ($2.2 million) profit [*] from the South Sea
Bubble, a speculative bust that bankrupted thousands of English families
in the 1720s. His great-, great-, great-, great-,
great-, great-grand- nephew boosted the deposits of his family’s bank by
20 percent in the past year to come through one of the worst financial
crises since then, which is why people might want to listen to him.
“Keep it simple, stupid,”[**] Alexander Hoare
said in an interview in his drawing room on the first floor of C. Hoare
& Co.’s 180-year-old office on London’s Fleet Street. “Get the
depositors in, lend to people who can afford to borrow.”
That’s a lesson Royal Bank of Scotland Group Plc should have learned, said Hoare, 46, whose family-owned firm started in 1672 and now has about 10,000 customers....MORE
HT: FT Alphaville who headlined their linkpost "Esoteric headline of the day"...
One of the reasons C. Hoare & Co. has made it to the ripe old age of 341 is that the shareholders are on the hook for any shortfall.
There is some comfort in knowing the bank owners stand to lose their personal property if they screw up.
Here's Bloomberg:
The Case Against Banking’s Case for Less Capital
By
Anat Admati & Martin Hellwig
Feb 4, 2013 5:30 PM CT
Wouldn’t it be nice if there was a
way to make banks safer, healthier and able to lend more? There
is a way, and it’s called equity.
If banks were less heavily indebted and relied more on
unborrowed money, also called equity or capital, to fund their
loans and other assets, they could avoid getting into financial
trouble if they incurred losses. They would be better able to
continue lending. And the financial system would be less
fragile.
Yet bankers fight regulation that would require them to
have more equity. They routinely claim that having more equity
would lower their return on equity. A lower return, they say,
would harm their shareholders and could make investment in their
shares unattractive relative to other industries. The suggestion
seems to be that society should be concerned with the banks’
return on equity and that, unless some specific return is
delivered to banks’ shareholders, we would all suffer. This line
of argument is fundamentally flawed.
The focus on return on equity (ROE) is deeply embedded in
the culture of banking. A typical statement in a leading
textbook, written by a prominent academic and former central
banker, is that bank capital “has both benefits and costs. Bank
capital is costly because, the higher it is, the lower will be
the return on equity for a given return on assets.”
False Claims
Such claims sometimes refer to the actual returns in any
given year, and sometimes to an average of returns. In either
case, the claim is false. If in some year a bank happens to earn
low returns on its investments, its ROE is actually higher if it
has more equity.
Even if the average return on equity is lower when a bank
has more equity, shareholders needn’t be harmed. In financial
markets, returns can’t be judged without accounting for the risk
taken, and the risk to shareholders is directly affected by the
amount of equity. In targeting high returns on equity, bankers
may actually benefit themselves while harming shareholders by
exposing them to risk without properly compensating them...MORE
For a more sophisticated version of Admati's argument see last week's FT Alphaville post, "
The perpetualisation of debt".
See also:
Prop Trading the South Sea Bubble: Hoare's Bank 1720
